German wage deals moderate so far, seen boosting growth less than in 2015

19 million workers negotiate pay agreements every 1 or 2 years

By Michael Nienaber

05/18/2016|hrreporter.com|Last Updated: 05/18/2016

BERLIN (Reuters) — The wage rises sealed by German unions for more than six million employees so far in this year's pay negotiations are relatively moderate compared to last year's agreements and may not help propel growth as much as in 2015, analysts say.

The wage deals are expected to further boost domestic demand as inflation remains at record lows. Europe's biggest economy is relying increasingly on private consumption rather than trade to drive growth because an economic slowdown in emerging markets is dragging on exports.

But there are questions whether this year's pay agreements will suffice to lift private consumption to propel growth as much as in 2015, when it contributed one percentage points to an overall expansion of 1.7 percent.

"The wage deals so far are a bit below the levels of 2015," said Reinhard Bispinck, wage expert at the WSI think tank which is close to German trade unions. He added so far no sector has managed to clinch an annual deal above three per cent which was the benchmark for most sectors in last year's negotiations.

Roughly 19 million workers in Germany are represented by unions who negotiate pay agreements every one or two years.

Early on Wednesday, about 785,000 German construction workers agreed a two-stage wage increase with employers over 22 months, the third significant pay hike sealed in recent weeks after similar deals in the public and metalwork sectors.

Under the agreement, reached after 14 hours of talks, construction employees in western states get a rise of 2.4 per cent, starting retroactively from May 1, and another 2.2 per cent from May 2017. Employees in eastern states get 2.9 per cent more pay this year and 2.4 per cent next.

Last week, the country's biggest trade union, IG Metall, agreed a landmark deal with employers, giving 3.8 million workers in the metalwork sector a pay hike of 2.8 per cent from July 1 and then by 2.0 percent from April 2017. Last year, the union managed to reach a one-year pay hike of 3.4 per cent.

In the public sector, more than two million employees won 2.4 per cent for this year, starting retroactively on March 1, and another increase of 2.35 per cent starting next February.

The German central bank said in its latest monthly report published on Tuesday that the wage increases reached in the public and metalwork sectors were "relatively restrained".

"The moderate wage agreements could send a signal for other sectors that are in negotiations," the Bundesbank said. It said it expected the strong rise in consumer purchasing power over the last two quarters to recede in coming months, also due to an anticipated rise in oil prices.

Based on the deals so far reached, nominal wages will rise by roughly 2.5 per cent in 2016, Commerzbank analyst Eckart Tuchtfeld and Sal. Oppenheim economist Ulrike Kastens said.

Last year, nominal wages rose by 2.7 per cent on average. With consumer price inflation at 0.3 per cent in 2015, this pushed up real wages by 2.4 per cent, the biggest increase in more than two decades.

Inflation is expected to inch up but still to remain ultra-low this year, meaning most employees can count on a real wage increase of more than two percent, Kastens said.

She also noted that rising employment is strengthening consumers' purchasing power, meaning overall disposable incomes were likely to increase by up to three per cent.

"Domestic demand will remain an important growth driver also this year," Tuchtfeld said.

Among the sectors in which wage deals are still to be negotiated in the coming weeks is the chemical sector.

The IG BCE union has demanded a 5 percent pay hike for the 550,000 employees for twelve months. The talks will start on May 30 in the state of Hesse.